UK Pushed to Catch up with Europe on ESG Ratings
Timeline, scope of regulation currently uncertain, as new proposal seeks to increase quality, transparency and comparability.
Plans for UK regulation of ESG ratings providers need to be accelerated to ensure maximum alignment with European rules that were rubber stamped in Brussels this week. Industry experts suggest UK requirements would need to be finalised and in effect from mid-2026.
The draft legislation proposed by HM Treasury is a response to investor concerns over the quality, transparency and comparability of the ESG ratings they use to inform investment decisions. It proposes that ESG ratings providers must seek authorisation from the Financial Conduct Authority (FCA) via an assessment of their supervisory effectiveness and business model.
ESG ratings are expected to continue to play an important role as investors orient their portfolios to be more sustainable.
“It remains crucial for investors and other users of ratings to have clarity on the sustainability profile and credentials of a given company to better inform their capital allocation and other activities, such as stewardship,” Oscar Warwick Thompson, Head of Policy and Regulatory Affairs and the UK Sustainable Investment and Finance Association (UKSIF), told ESG Investor.
But experts are concerned the UK is lagging the EU, after HM Treasury said in its consultation response that the finalised rules will take up to four years to come into force.
Following a consultation period, the government will introduce a bill in Parliament next year. But the FCA also needs time to craft the rules – a process which will kick off with a separate consultation in 2025.
Meanwhile, the European Council adopted the bloc’s ESG ratings regulation – first proposed last year – on 19 November. It will formally pass into law in December and enter into force from June 2026.
“It would be beneficial for firms if the UK rules came into effect on a similar timeline to the EU requirements to help alignment and implementation,” said Richard Andrews, Head of ESG at KPMG UK.
In practice, this would mean finalising the UK policy by June next year to provide firms with a one-year transitional implementation period.
“This is possible but, given the need for an FCA consultation following UK legislation, the timeline for achieving that objective will be tight,” Andrews said.
Interoperability between the two jurisdictions will help to maximise efficiency and consistency across the ESG ratings market, as well as keeping down compliance costs.
“The UK and EU regimes are otherwise likely to have similar features,” Andrews added. “Both will require ratings providers to regularly review the relevance and appropriateness of their methodologies and to implement safeguards to ensure that their business activities do not conflict with the ratings that they provide.”
The FCA welcomed the government’s draft legislation and is supportive of an approach that also aligns with the International Organization of Securities Commissions’ 2021 recommendations.
Last year, the FCA commissioned the International Capital Market Association and the International Regulatory Strategy Group to develop a voluntary code of conduct for ESG ratings providers.
Grey area
The exact scope of the UK’s regulatory regime is still yet to be wholly defined.
The government has currently proposed exclusions for specific activities, such as ESG ratings produced for internal use, consulting services, and academic or journalistic outputs.
While UK-based firms providing ESG ratings – to both UK and international consumers – fall under the regulation, the government is still considering its approach to firms that service UK clients via other market access arrangements, such as those providing credit ratings, benchmarks and overseas funds. As such, it has currently proposed excluding these.
“[This] seems appropriate, but the exact parameters of the exclusion [are currently unknown],” said Premlata Fagan, Managing Associate of Financial Regulation at law firm Linklaters.
HM Treasury has also considered the potential impact of ESG ratings regulation on financial services firms. The development of products or services offered by banks or asset managers can involve the creation of an ESG rating – for instance, to support engagement with end-investors and benchmark performance against the wider sector.
“Without a specific exclusion, this type of activity could theoretically require dual authorisation by falling within the scope of the ESG ratings regulation by virtue of [our] activity definition,” HM Treasury said.
The draft legislation has outlined a specific exclusion for firms from needing to apply for permission to provided ESG ratings in such circumstances.
“This exclusion applies in respect of any product or service that is [already] regulated by the FCA,” HM Treasury said.
Despite acknowledgment of the compliance challenges that could arise for smaller firms, HM Treasury has also suggested bringing them into scope.
“This means that all firms in scope of the regulation will be required to apply for authorisation,” said Linklaters’ Fagan.
“It has yet to be decided how the FCA intends to introduce proportionality into the way its rules bite on different providers. [This] will be key, and the devil will be in the detail.”
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